Disney shares recover after results spark early selling

DavidB. Wilkerson

LOS ANGELES (MarketWatch) -- Wall Street and investors sounded the warning call Friday after Walt Disney Co. appeared at last to succumb to a difficult economy by reporting earnings that came up short of estimates, but some analysts maintained that the blue-chip company's fundamentals were strong.

While they plunged more than 8% shortly after the open, shares of Disney
DIS, -0.02%
turned higher as the session progressed. The shares swung to a gain of more than 5% in afternoon trading before settling back to close at $23.36, up 2.4%.

The earnings report caused many analysts to adjust their estimates for a company that has seemed largely immune to troubles that other firms were experiencing in the face of a crumbling economy.

S&P analyst Tuna Amobi cut his rating on Disney to "hold" from "strong buy" after the earnings report was released late Thursday, slashing his price target by $7, to $25.

"In a sobering near-term outlook, Disney sees further sharp deterioration in park bookings and ABC/ESPN ads, while halting share buybacks," Amobi wrote in a morning note to clients.

Other analysts noted, however, that it was Disney's first earnings shortfall to come along in some time.

Doug Mitchelson of Deutsche Bank maintained a buy rating on Disney, noting that recent weakness in the stock seems to have been the result of bracing for the day when recession-like conditions would hit Disney.

"Unlike some peers, Disney's challenges are predominately cyclical, not secular," Mitchelson wrote in his note. "Currency risk is fully hedged. Its brands remain strong and growing, and barriers to entry in its businesses are very high."

The Burbank, Calif.-based entertainment conglomerate reported that it earned $760 million, or 40 cents a share, in the fourth quarter ended Sept. 27, compared with a profit of $877 million, or 44 cents a share, in the final three months of fiscal 2007. Revenue rose 6% to $9.45 billion, on improved results generated by the company's cable networks and theme parks.

Disney said quarterly profit fell due to a $91 million bad-debt charge on a payment it was due from Lehman Brothers as well as a combination of higher expenses and less successful films at its studio-entertainment division. Financial-services firm Lehman went bankrupt in September, helping to trigger a global financial meltdown.

Disney said that excluding the charge and other special items, it would have earned 43 cents a share in the latest three months. Analysts polled by FactSet Research had expected the company to report a fourth-quarter profit of 49 cents a share on sales of $9.31 billion.

Parks, resort bookings down

Chief Executive Bob Iger told analysts that the company is seeing consumer confidence at its lowest in more than three decades due to the dismal state of the economy, which he could curtail consumer spending during the holiday season in 2008 and "almost certainly" will during calendar 2009.

Bookings at the company's theme parks and resorts during the last month "have fallen off considerably," Iger said during a conference call.

He added that consumers are being "very careful about what they spend" and could be waiting to see if discounts become available.

Iger emphasized that the company's exposure to local television advertising, one of the areas of biggest turmoil during the current crisis, is "limited," as Disney owns only 10 TV stations.

"This is a team that manages through good times and really tough times -- particularly in the 2001 period," Iger said. "So not only have we gone through this before, but we've gotten better at it, particularly in parks and resorts."

The company's media networks division, which includes its broadcast and cable-TV networks, saw quarterly revenue increase 4% to $4.2 billion.

Cable networks revenue jumped 5% to $2.93 billion on greater ad sales and rates at ESPN, as well as higher fees paid by cable and satellite operators. The unit was also once again lifted by strong DVD sales of "High School Musical 2" and increased fees paid by cable and satellite operators for carrying the Disney Channel.

Revenue at the company's ABC network and television stations rose 4% to $1.29 billion, but the segment posted an operating loss of $150 million on decreased advertising sales at both the network and the local stations. Expenses also increased at ABC, reflecting costs related to coverage of the presidential election and late decisions on which new shows would be picked up for the season.

Theme parks and resorts revenue rose 7% to $3 billion in the September quarter, but operating income fell 4% on a decrease in domestic operations, partially offset by improved results at Disneyland Resort Paris.

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